Question

You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $7,300 per month for the next three years, or you can have $6,000 per month for the next three years, along with a $32,500 signing bonus today. Assume the interest rate is 8 percent compounded monthly.

If you take the first option, $7,300 per month for three years, what is the present value? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value            $

What is the present value of the second option? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Present value            $

Answer 1

Option 1:

Monthly Payment = $7,300
Annual Interest Rate = 8%
Monthly Interest Rate = 0.667%
Period = 3 years or 36 months

Present Value = $7,300 * PVIFA(0.667%, 36)
Present Value = $7,300 * (1 - (1/1.00667)^36) / 0.00667
Present Value = $7,300 * 31.90993
Present Value = $232,942.49

Option 2:

Signing Bonus = $32,500
Monthly Payment = $6,000
Annual Interest Rate = 8%
Monthly Interest Rate = 0.667%
Period = 3 years or 36 months

Present Value = $32,500 + $6,000 * PVIFA(0.667%, 36)
Present Value = $32,500 + $6,000 * (1 - (1/1.00667)^36) / 0.00667
Present Value = $32,500 + $6,000 * 31.90993
Present Value = $223,959.58